TORONTO, Oct 20 (Reuters) - Air Canada ACb.TO and its flight attendants’ union on Thursday agreed to avoid a strike and let an arbitrator resolve a bitter and drawn-out labour dispute.

Hearings will commence Oct. 28 and a binding arbitration award will be issued on or before Nov. 7, the two sides said in separate statements.

No strike or lockouts may occur during the process, a requirement of Canada’s Labour Code.

The airline, Canada’s largest carrier, and the Canadian Union of Public Employees (CUPE) that represents its 6,800 flight attendants, said that the two parties agreed that arbitration was the best way to resolve the contract dispute.

Last week the union came to the brink of a strike for the second time in three weeks after its members rejected a second new labour agreement with Air Canada.

The strike was averted when Canada’s Minister of Labour took the unusual step of asking the Canadian Industrial Relations Board (CIRB), a quasi-judicial tribunal that administers and interprets parts of Canada’s Labour Code, to intervene.

Canada’s Conservative government has repeatedly said that the country’s fragile economy cannot afford a strike at Air Canada, which flies passengers and cargo to more than 175 destinations on five continents.

Air Canada and CUPE will now meet to decide on a mutually agreeable arbitrator. If there is no agreement on an arbitrator, the CIRB will appoint one.

“Air Canada is pleased to have a process in place whereby we can avoid any disruption of service,” said Chief Operating Officer Duncan Dee, in a statement.

Both parties also agreed to withdraw unfair labour practice complaints filed against each other.

“Our members deserve a fair collective agreement,” said Paul Moist, national president of CUPE in a statement. “And I believe in the present circumstances arbitration is the best way to achieve that goal.”

Flight attendants, whose labour contract expired on March 31, 2011, are unhappy with Air Canada’s plans to start up a low-cost carrier that would pay lower wages to cabin crew.

They have also expressed dissatisfaction with working conditions, notably pay for layovers between flights. Employees have demanded sizable wage and benefit increases after accepting status quo agreements in the last round of bargaining in 2009 when Air Canada teetered on the edge of bankruptcy.

Reporting by Euan Rocha. Additional reporting by Nicole
Mordant in Vancouver; Editing by Gary Hill and David Cowell